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June 25, 2020, 6:45 a.m. EDT

Bank stocks may ‘rally powerfully’ once investors realize their concerns are overblown

The Federal Reserve’s stress tests will be made public June 25, helping to erode concerns over profits

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By Philip van Doorn, MarketWatch


MarketWatch photo illustration/Bloomberg

Bank stocks have taken a beating, and investors have plenty to fear, including the Federal Reserve’s stress tests, whose results will be released June 25. Investors expect low interest rates to hamper profits, and a decimated economy to increase loan losses.

There's a lot to take in, especially as the reopening of the U.S. economy is marked by rising coronavirus infections in half of the states.

But some concerns are overblown, and banks’ own change in behavior following the 2008 crisis is expected by many analysts to serve them and their shareholders well.

Doug Peta, chief U.S. investment strategist at BCA Research, said the five bank stocks listed below are ideally priced for long-term investors.

BCA is an independent research firm based in Montreal and founded in 1949. It has more than 60 analysts and doesn’t manage money or run brokerage services. Clients include institutional money managers of all types.

Here’s how the KBW Bank Index /zigman2/quotes/210598427/realtime BKX -0.95%  has performed this year:


FactSet

The index comprises 24 stocks of universal and large regional U.S. banks. You can see it’s above its low when the U.S. stock market bottomed in March. It also took a dive two weeks ago, after the Federal Reserve projected the federal funds rate would remain near zero through 2022.

If you look at the “big four” U.S. banks — J.P. Morgan Chase & Co. /zigman2/quotes/205971034/composite JPM -1.04% , Bank of America Corp. /zigman2/quotes/200894270/composite BAC -0.48% , Citigroup Inc. /zigman2/quotes/207741460/composite C -0.91%  and Wells Fargo and Co. /zigman2/quotes/203790192/composite WFC -1.15% — and add U.S. Bancorp /zigman2/quotes/206934678/composite USB -1.06%  of Minneapolis, the stocks are trading on average for 1.2 times tangible book value, down from 1.6 a year ago:

Bank Ticker Price/ tangible book value Price/ tangible book value - 1 year ago
J.P. Morgan Chase & Co. /zigman2/quotes/205971034/composite JPM   1.61 1.92
Bank of America Corp. /zigman2/quotes/200894270/composite BAC   1.24 1.55
Citigroup Inc. /zigman2/quotes/207741460/composite C   0.73 0.64
Wells Fargo & Co. /zigman2/quotes/203790192/composite WFC   0.83 1.43
U.S. Bancorp /zigman2/quotes/206934678/composite USB   1.74 2.52
Averages 1.23 1.61
Source: FactSet

These are the largest five U.S. banks by total assets, excluding the investment-banking giants Goldman Sachs Group Inc. /zigman2/quotes/209237603/composite GS +0.29% and Morgan Stanley /zigman2/quotes/209104354/composite MS +1.17% . The big four have diversified businesses, including lending, underwriting, money management and brokerage services. Peta described U.S. Bancorp as a “pure-play commercial bank.”

In an interview, Peta said current valuations for the group are “awfully low, based on history,” and that buying the stocks at similar valuations “has proven to be a really good entry point.”

Moving parts

Let’s look at three areas scaring investors away from big bank stocks: 1. Stress tests; 2. Loan quality; and 3. Interest rates.

Stress tests and dividends

The Federal Reserve concludes its annual two-part stress-test process June 25 at 4:30 ET. The regulator will announce which of the 34 large U.S. banks and U.S. subsidiaries of foreign banks have passed the first part, the Dodd-Frank Act Stress Tests (DFAST).

Some of the economic fallout from COVID-19 has been considerably worse than the Fed’s “severely adverse scenario” that was released in February . So the regulator is augmenting DFAST, but hasn’t provided much detail on how.

One change, described by Federal Reserve Vice Chair for Supervision Randal K. Quarles on June 19, is a “sensitivity analysis” that will consider banks’ capital levels under “a rapid V-shaped recovery,” as well as a “slower, more U-shaped recovery,” through which the economy regains only a small portion of what it lost by the end of 2020, and a “W-shaped double-dip recession,” through a second wave of coronavirus containment.

The second part of each bank’s stress test is the Comprehensive Capital Analysis and Review (CCAR). We’ll find out June 25 which of the bank’s capital plans were accepted by the Fed, but we won’t get all the details until the banks make their own announcements June 29.

/zigman2/quotes/210598427/realtime
US : U.S.: Nasdaq
79.30
-0.76 -0.95%
Volume: 0.00
Aug. 12, 2020 12:21p
loading...
/zigman2/quotes/205971034/composite
US : U.S.: NYSE
$ 102.74
-1.08 -1.04%
Volume: 8.27M
Aug. 12, 2020 12:21p
P/E Ratio
13.87
Dividend Yield
3.50%
Market Cap
$316.40 billion
Rev. per Employee
$497,647
loading...
/zigman2/quotes/200894270/composite
US : U.S.: NYSE
$ 26.79
-0.13 -0.48%
Volume: 30.22M
Aug. 12, 2020 12:21p
P/E Ratio
12.90
Dividend Yield
2.68%
Market Cap
$233.24 billion
Rev. per Employee
$543,289
loading...
/zigman2/quotes/207741460/composite
US : U.S.: NYSE
$ 53.27
-0.49 -0.91%
Volume: 8.48M
Aug. 12, 2020 12:21p
P/E Ratio
9.26
Dividend Yield
3.82%
Market Cap
$111.92 billion
Rev. per Employee
$479,167
loading...
/zigman2/quotes/203790192/composite
US : U.S.: NYSE
$ 25.03
-0.29 -1.15%
Volume: 21.34M
Aug. 12, 2020 12:21p
P/E Ratio
28.63
Dividend Yield
1.60%
Market Cap
$104.32 billion
Rev. per Employee
$392,114
loading...
/zigman2/quotes/206934678/composite
US : U.S.: NYSE
$ 37.87
-0.40 -1.06%
Volume: 1.90M
Aug. 12, 2020 12:21p
P/E Ratio
11.93
Dividend Yield
4.42%
Market Cap
$57.65 billion
Rev. per Employee
$342,274
loading...
/zigman2/quotes/205971034/composite
US : U.S.: NYSE
$ 102.74
-1.08 -1.04%
Volume: 8.27M
Aug. 12, 2020 12:21p
P/E Ratio
13.87
Dividend Yield
3.50%
Market Cap
$316.40 billion
Rev. per Employee
$497,647
loading...
/zigman2/quotes/200894270/composite
US : U.S.: NYSE
$ 26.79
-0.13 -0.48%
Volume: 30.22M
Aug. 12, 2020 12:21p
P/E Ratio
12.90
Dividend Yield
2.68%
Market Cap
$233.24 billion
Rev. per Employee
$543,289
loading...
/zigman2/quotes/207741460/composite
US : U.S.: NYSE
$ 53.27
-0.49 -0.91%
Volume: 8.48M
Aug. 12, 2020 12:21p
P/E Ratio
9.26
Dividend Yield
3.82%
Market Cap
$111.92 billion
Rev. per Employee
$479,167
loading...
/zigman2/quotes/203790192/composite
US : U.S.: NYSE
$ 25.03
-0.29 -1.15%
Volume: 21.34M
Aug. 12, 2020 12:21p
P/E Ratio
28.63
Dividend Yield
1.60%
Market Cap
$104.32 billion
Rev. per Employee
$392,114
loading...
/zigman2/quotes/206934678/composite
US : U.S.: NYSE
$ 37.87
-0.40 -1.06%
Volume: 1.90M
Aug. 12, 2020 12:21p
P/E Ratio
11.93
Dividend Yield
4.42%
Market Cap
$57.65 billion
Rev. per Employee
$342,274
loading...
/zigman2/quotes/209237603/composite
US : U.S.: NYSE
$ 211.66
+0.60 +0.29%
Volume: 1.04M
Aug. 12, 2020 12:21p
P/E Ratio
16.09
Dividend Yield
2.36%
Market Cap
$72.62 billion
Rev. per Employee
$1.34M
loading...
/zigman2/quotes/209104354/composite
US : U.S.: NYSE
$ 52.39
+0.60 +1.17%
Volume: 4.32M
Aug. 12, 2020 12:21p
P/E Ratio
9.47
Dividend Yield
2.67%
Market Cap
$81.64 billion
Rev. per Employee
$831,709
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